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Cabinet clears way for direct transfer of fertilizer  subsidy-Surabhi Agarwal, Aman Malik and Liz Mathew
-Live Mint

Step is another sign of government intent to move towards direct transfer for all programmes

The Union cabinet on Thursday approved a proposal that will eventually lead to the direct transfer of cash subsidies to farmers for fertilizer, two weeks after it put in place the architecture to enable such a transition.

The step is another sign of the government’s intent to move towards a regime of direct transfer of cash subsidies for all its various programmes in order to ensure that the benefits of such schemes reach the intended targets.

Last month, the government set up a ministerial committee headed by Prime Minister Manmohan Singh to steer the effort that aims to prune leakages in its delivery of subsidies. Subsidy payments and benefits under different schemes amount to nearly Rs.3 trillion, roughly 3.5% of the gross domestic product, according to government estimates.

Payment of the fertilizer subsidy to companies will be based on the receipt of delivery by retailers, which will be tracked through the mobile-enabled fertilizer monitoring system (FMS).

“A part of the subsidy will be paid on receipt of fertilizers in the district to the companies,” the government said in a release.

A task force headed by Nandan Nilekani, chairman of the Unique Identification Authority of India (UIDAI), had proposed transfer of the fertilizer subsidy in a phased manner starting from the retailer to the farmer. The task force was set up to study the feasibility of direct transfer of cash subsidies on fertilizer, cooking gas, kerosene and those in the public distribution system.

In order to examine the feasibility of transferring the subsidy directly at the farmer level, the cabinet also approved a pilot project in 10 districts, which will be started by the end of this year.

“This will also be tracked through ICT (information and communication technology) enabled tools, and identification of the farmers will be done through the Kisan Credit Card, Aadhaar number, bank account number, etc.,” the government said.

The setting up of the national missions two weeks earlier and cabinet approvals as in the case of fertilizer on Thursday marked the “final stamp of approval” on the shift to a direct-transfer regime.

A government official, who requested he not be identified, said that talks are under way for a similar regime in cooking gas as well. The government recently imposed a cap of six subsidized cylinders on each family, after which the purchase will have to be made at market price.

“A process is being worked out where even for the six cylinders, the consumer will pay the market price while the subsidy money will be transferred to their Aadhaar-linked bank accounts,” the official said.

Plans for a direct transfer to Aadhaar-linked bank accounts are in the pipeline in the case of various other government schemes such as the marquee Mahatma Gandhi National Rural Employment Guarantee Scheme, the Indira Awaas Yojana and the Janani Suraksha Yojana, along with other pensions and scholarships.

Electronic payments could save an estimated Rs.1 trillion a year—nearly 10% of the total payment flows between the government and households, a 2010 report by consulting firm McKinsey had said. “The benefits of an e-payment system far outweigh the costs,” it had said.

While presenting the budget earlier this year, then finance minister Pranab Mukherjee had accepted the Nilekani task force recommendations and said Aadhaar-enabled cash payments for various government schemes will be rolled out in at least 50 districts within six months.

“A mobile-based fertilizer management system has been designed to provide end-to-end information on the movement of fertilizers and subsidies, from the manufacturer to the retail level,” he had said. This will be rolled out across the country this year and, subsequently, extended to farmers, he had said.

Fertilizer manufacturers are currently reimbursed to the tune of 85% of the subsidy once the sale of their product is recorded at the district level. The remainder is released when the sale is recorded at the level of individual retailers within the district. The government plans to go about the shift in a phased manner, said a top fertilizer ministry official.

In the first phase, the government will track sales of the farm nutrients up to the retailer level via a text messaging system. This exercise will be made compulsory on 1 November. Dealers will now be required to pass on information to the government’s Web-based FMS, via text messages. FMS is an Internet-based platform that currently tracks the movement and sale of fertilizers in the country. “This process will be finally extended to the farmer,” the official said.

The cabinet has directed the ministry to begin a pilot project in the final phase in 10 districts of the country and begin tracking the sale of fertilizer right down to the farmer.

To be sure, there is no provision of any direct cash subsidy just yet, the official said. He said the government first wants to clearly establish the process for tracking fertilizer sales up to the farmer level before going ahead with a direct transfer of the cash subsidy. The cabinet has given no time frame for the completion of the pilot project.

A senior cabinet minister had said last week that a direct transfer of subsidy was not immediately possible since there are “too many points of sale”.

“The UID mechanism will be used to authenticate the identity of people. So, eventually a person’s UID number will help us identify whether he is a farmer or not, and if the subsidy should actually be targeted at him,” said a second fertilizer ministry official, explaining the government’s rationale behind the move.

Satish Chander, director general of the Fertiliser Association of India, the principal industry lobby group, expects the transition to take at least two years.

The move will eventually ensure demand rationalization in the market, said Sanjay Jain, director at Taj Capital Partners Pvt. Ltd, a New Delhi-based investment firm that has interests in the fertilizer sector. “Once that happens, the government’s subsidy bill will begin coming down,” he said.

The first fertilizer ministry official said that as a means of incentivizing the retailer to keep feeding correct and timely information into the text message-based FMS system and to cover costs for acquiring the equipment needed for authenticating farmers, the government will provide an additional consideration for every tonne of fertilizer sold. The extra consideration for urea was fixed at Rs.50 per tonne at Thursday’s cabinet meeting.